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Canada ponders pulling the plug on the penny

By Bruce Campion-SmithOttawa Bureau chief

Thu., July 15, 2010

OTTAWA – Is Canada facing a penniless future?

While Finance Minister Jim Flaherty has openly mused about the end of the one-cent coin, documents reveal that officials from his department have been in discussions with the Royal Canadian Mint to prepare for the day when the penny finally drops.

(DAVID COOPER / TORONTO STAR)

They’ve talked to officials in both Australia and New Zealand — two countries that have axed the one-cent coins — to learn about their experience in a penny-free society.

They considered how the end of the penny would affect cash purchases.

And they’ve mused about plans to convince Canadians to part with the stock of 30 billion pennies produced since 1908, many of which are rattling around bedroom drawers, piggy banks, kitchen jars — and weighing down pockets and purses.

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One briefing note prepared by the mint in December was done “to provide information to the government to assist them in their deliberations on the future of the one-cent coin.”

It says Ottawa could withdraw the penny from circulation but still allow them to be accepted for commerce. Or it could end production of the penny and “demonetize” the coin on a specific date, meaning they could no longer be used to pay for purchases.

Pity the penny. When first produced at the Ottawa Mint in 1908 (earlier production was done in England), you could buy a paper for two cents and a loaf of bread for five cents. But since then, it has lost 95 per cent of its purchasing power, Pierre Duguay, the deputy governor of the Bank of Canada, told a Senate committee in May.

Despite its drop in buying power, Canadians still have an insatiable demand for the coin — almost 1 billion pennies a year. The mint produces 500 million and the rest come from recycling by persuading Canadians to part with pennies that have been hoarded away.

To add insult to injury, it costs about 1.5 cents to produce and distribute each one-cent coin, meaning production is costing taxpayers a pretty penny.

Documents obtained by the Star reveal that discussions between officials at the Mint and the finance department about the penny played out last fall and winter. That was in the run-up to the March 4 budget, suggesting that the government may have wanted to use its financial blueprint to announce the end of the penny.

The budget did unveil steps to “modernize” Canada’s currency, such as a new series of more secure and longer-lasting bank notes starting next year and changes to the composition of the $1 and $2 coins to make production more efficient.

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Documents show Canadian officials were keenly interested in the fallout after New Zealand and Australia eliminated their one-cent coins. Finance department officials canvassed staff at both the Royal Australian Mint and the Australian Treasury to ask about their experience in eliminating both the Aussie one and two cent coins in 1990.

Aris Gounaris, of the Australian Treasury, replied his country opted to remove the one-cent coins because they had lost their purchasing power and the cost of producing them exceeded their face value.

He said a government branch, known then as the Prices Surveillance Authority, issued guidelines for managing the withdrawal of the coins from market and to alleviate consumer concerns. Under the guidelines for cash purchases, the price is rounded to the nearest 5 or 10.

Electronic purchases made with debit cards and credit cards continue to be made to the exact cent.

“It appears that the decision to remove the coins had a negligible impact on prices,” Gounaris wrote.

The Bank of Canada has also looked at the possible inflationary impact of taking the penny out of the circulation and found there’s little to fear.

“The findings . . . show that any impact on inflation would be insignificant and more likely non-existent,” Duguay told Senators in May.

“On some transactions, the merchant loses and the consumer wins; on some, the merchant wins and the consumer loses. However, on balance it evens out,” he said.

For all its groundwork on the issue, the Mint doesn’t take an official position on the future of the penny, saying only that it “acts as a technical advisor” to the government.

“The final decision to remove any coin denomination from circulation rests with the government,” the Mint said in one document.

Asked about the issue on Thursday, the finance department noted that the fate of the penny is being reviewed by the Senate finance committee.

“The department of finance looks forward to reviewing the committee’s findings once they are concluded,” spokesperson Suzanne Prebinski said.

The Canadian penny

Technical specifications

1908 (opening year of the Ottawa branch of the Royal Mint, which became the Royal Canadian Mint in 1931)

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